Earlier this week, the New York City Department of Health and Mental Hygiene (the “Department”) issued a statement banning the addition of CBD, otherwise known as cannabidiol, to food and beverage items offered for sale across New York City. As CBD-infused products continue to gain widespread popularity, the Department’s enforcement efforts have left restaurant and business owners somewhat perplexed and in search of answers.

In apparent reliance on U.S. Food and Drug Administration (“FDA”) guidelines, the Department has prohibited New York City restaurants from “[adding] anything to food or drink that is not approved as safe to eat”, which the Department goes on to state includes CBD, a non-psychoactive chemical compound produced by the cannabis plant. Despite popular opinion regarding CBD and its curative impact on a wide range of conditions, the FDA maintains CBD as “unsafe for consumption” as a food and/or dietary supplement additive, based on the relative absence of substantiated scientific evidence.

While CBD derived from THC-producing cannabis plants remains classified as a Schedule I controlled substance under the Controlled Substances Act, hemp-derived CBD was de-scheduled as a controlled substance under the Agriculture Improvement Act of 2018, or the 2018 Farm Bill, signed into law on December 20, 2018. However, Congress explicitly preserved the FDA’s authority to regulate products containing cannabis and/or cannabis-derived compounds, regardless of derivation, under the Federal Food, Drug, and Cosmetic Act. As a result, it remains unlawful to introduce CBD-infused products into interstate commerce and to market CBD products as a dietary supplement and/or product offering therapeutic benefits, without requisite FDA approval.

As New Jersey remains in a holding pattern, the Empire State has made a revitalized push in the race toward legalization. In his annual budget address last week, Governor Andrew Cuomo formally unveiled New York State’s plans for a “first-in-nation” comprehensive cannabis regulatory framework. Much like his colleague Governor Phil Murphy, Governor Cuomo is now calling for swift legislative action and expedited entry into a legal cannabis market estimated to generate up to $300 million in annual tax revenue for the State by the programs third year.

Establishment of a three-tier distribution model comprised of licensed producers, distributors and retailers, and imposition of a ban on ownership by producers of retail dispensaries

Creation of the Office of Cannabis Management to oversee administration of the Act and centralize all licensing, enforcement and economic development functions across the medical, adult-use and industrial cannabis markets

Three-tier taxation scheme at the cultivation and wholesale stages:

(1) Cultivation tax at a rate of $1 per dry weight gram of cannabis flower and $0.25 per dry weight gram of cannabis trim

(2) Wholesale tax imposed on the sale by wholesalers to retail dispensaries at a rate of 20% of the invoice price

(3) Wholesale tax imposed on the same sale at a rate of 2% of the invoice price, to be collected and held in trust for and on account of the county in which such retail dispensary is located

Establishment of Canopy Growth Corporation’s $100 million Hemp Industrial Park, headquartered in the Southern Tier, to include growing, processing, manufacturing and research facilities

Continued expansion of the current medical cannabis program and patient access

Despite relatively broad strokes, the primary goals of the proposed Act are clear: to foster and protect public health, safety and welfare, encourage responsible, informed and carefully regulated production and use of cannabis, and to promote social justice and equity. Per Governor Cuomo’s Budget, tax revenue generated from the adult-use cannabis market will be deployed for various social and research-related causes, including research on cannabis uses and applications, small business development and loans, substance abuse, harm reduction and mental health treatment and prevention, and public health education and intervention. The Act also proposes to limit the number of producers and retail dispensaries to safeguard against “market collapse”, and encourage participation by underserved communities through social equity licensing opportunities, technical assistance, mentorship and access to capital.

The legalization of medical cannabis under New Jersey’s Compassionate Use of Medical Marijuana Act (“CUMMA”), and Governor Phil Murphy’s recent expansion of the program, has created many questions for employers in adapting to the changing legal landscape. With the impending legalization of the adult use of cannabis on the horizon, employers now more than ever need to understand their obligations to reasonably accommodate employees and their rights (if any) to terminate employees for cannabis use.

Cannabis is still classified as a Schedule I substance under federal law and therefore, any use of cannabis (medical and adult use alike) violates federal law. Employers are accordingly not required to accommodate the use of medical cannabis under the Americans with Disabilities Act. Despite this reality, more than half of states, including New Jersey, have enacted laws to allow the medicinal use of cannabis.

With the enactment of CUMMA, many New Jersey employers are left wondering whether they have to accommodate the use of medical cannabis both inside and outside the workplace. Significantly, CUMMA states that “nothing in this act shall be construed to require . . . any employer to accommodate the medical use of marijuana in any workplace.” N.J.S.A. 24:6I-14 (emphasis added). As a result, an employee who is clearly found to be using cannabis at work, even a registered patient with a valid medical cannabis ID card from the New Jersey Department of Health, may be terminated by his or her employer.

Indeed, this past August, the United States District Court for the District of New Jersey in Cotto v. Ardagh Glass Packing, Inc. held that an employer was not required to accommodate a fork lift driver’s medical cannabis use, despite the fact that the driver’s doctor gave him a note stating that he could operate machinery while using his prescription. In that case, the employer required the employee to pass a drug test before he could return to work after sustaining an injury while operating a fork lift. In rejecting the fork lift driver’s claims under the New Jersey Law Against Discrimination (“LAD”), the court noted that the case concerned conduct resulting from the treatment of a disability, not the disability itself. The court reasoned that nothing in LAD or CUMMA required an employer to accommodate the use of medical cannabis in the workplace.

Employers are faced with a more complicated situation when an employee uses medical cannabis outside of the workplace and tests positive for cannabis. As an initial matter, testing for cannabis use is imprecise and only indicates whether cannabis was used within the past several weeks. As such, employers are unable to determine the precise date of cannabis use and therefore whether the use impaired the employee’s ability to perform his or her job duties.

This past February, the New Jersey Superior Court addressed the issue of employee cannabis usage outside of the workplace in Wild v. Carriage Funeral Holdings, Inc. In that case, the employee, a funeral services director, was involved in an accident which occurred during the course of his employment through no fault of his own (and with no connection to his medical cannabis usage). His employer learned about his lawful nighttime medical cannabis use and demanded that the employee take a drug test, which came back positive. The employer terminated the employee for his violation of its drug and alcohol policy. The employee brought a case against his former employer for violations under LAD. In granting the employer’s motion to dismiss, the court held that CUMMA does not contain employment-related protections for users of medicinal cannabis and no accommodations are required to be made in the workplace. Therefore, this decision indicates that at least in some instances, an employer may terminate an employee for cannabis use outside of the workplace. Notably, this decision involved an employee whose job duties included operating a motor vehicle and the use of medical cannabis on the job would have directly affected his ability to perform that job duty.

Employers, however, should be wary of the law surrounding workplace drug testing as employers are not permitted to blindly force their employees to take drug tests without meeting certain criteria first. While New Jersey has not enacted any specific law to regulate private sector drug testing, in 1992, the New Jersey Supreme Court set forth several guiding principles in Hennessey v. Coastal Eagle Point Oil Co. Generally, private sector employers are prohibited from “random” drug testing except for employees in “safety-sensitive” positions. Indeed, employees that do not hold “safety-sensitive” positions should only be tested for individualized cause that is job-related. While there is no one definition of a “safety-sensitive” position, the job duties likely entail tasks like the operation of heavy equipment, driving a motor vehicle, or providing medical care. Moreover, any drug testing program must meet certain procedural requirements, including, but not limited to, a procedure that allows as much privacy and dignity as possible and employee notice of the program, which details the method of testing. In sum, employers do not have an absolute right to require employees to submit to drug testing.

Overall, New Jersey employers should carefully consider making termination decisions based on employees’ cannabis usage and abide by the drug testing principles set forth by the New Jersey Supreme Court. Employers should also continue to closely monitor any developments in the law. While CUMMA currently does not require employers to accommodate medical cannabis usage in the workplace, other states have recently decided otherwise. Moreover, proposed legislation, such as Senate Bill Number 830 (which would legalize the adult use of cannabis for recreational purposes), would prohibit an employer from taking an adverse employment action against an employee for cannabis use, unless the employer has a “rational basis for doing so which is reasonably related to the employment, including the responsibilities of the employee or prospective employee.” This proposed legislation does not require employers to permit or accommodate the use of cannabis in the workplace or affect employers’ ability to maintain/enact drug-free workplace policies that prohibit the use of cannabis in the workplace.

In sum, employers should review their current anti-discrimination and drug and alcohol policies to ensure compliance with the current state of the law and continue to follow any developments in new legislation. Significantly, even though New Jersey employers are not presently required to accommodate use of medical cannabis in the workplace, they are still under an obligation to engage in the interactive process with employees to reasonably accommodate their underlying medical conditions in other ways. Employers with any questions should consult counsel to ascertain their specific rights and obligations.

After waiting months for word on cannabis legalization talks in New Jersey, budgetary committees from both the state Senate and Assembly approved the New Jersey Marijuana Legalization Act (“Act”), thus, paving the way for the New Jersey Legislature to fully vote on the Act. This marks a historic time in New Jersey for those fighting for the further expansion of medicinal use and legalization of adult-use cannabis in New Jersey as this is the first adult-use legalization bill to make it past introduction in New Jersey. The Legislature is scheduled to be back in session December 17th. This is an exciting time for our existing Clients and friends in the cannabis community as we look forward to the future expansion of the cannabis industry in New Jersey.

We have received an unusually high number of inquiries from clients and commentators concerning the patent infringement action filed by United Cannabis Corporation (UCANN) against Pure Hemp Collective Inc. late last month. (SeeUnited Cannabis Corp. v. Pure Hemp Collective Inc., Case No. 1:18-cv-01922-NYW (D.Colo).) For those not paying attention, the case involves allegations that Pure Hemp’s tinctures, gel capsules, vape pens, and other cannabis products infringe one or more claims of UCANN’s patent for “cannabis extracts and methods of preparing and using same.” (U.S. Patent No. 9,730,911.)

The hype is not unwarranted. The case, filed in federal court in Colorado, has major implications on two fronts: (i) the enforcement of the UCANN patent specifically; and (ii) the overall viability of litigation concerning cannabis-related patents. First, at the industry level, a determination as to the validity and enforceability of what most consider to be a rather broad patent could dictate whether UCANN will be able to successfully enforce this patent against all others utilizing a liquid cannabinoid formulation containing 95% cannabidiol (CBD). From a broader perspective, this is the first infringement suit concerning a patent on a cannabis-related product that, while patented, is used in connection with a substance that remains illegal at the federal level – leaving open a threshold question concerning the ability of the courts to even hear such cases.

Absent a quick settlement, it is difficult to conceive of any outcome, whether it be at the motion to dismiss stage or at trial, that will not send shockwaves through the industry. Who those shockwaves impact most remains to be seen, and we will certainly update this blog as the case proceeds.

In a recent decision, United States v. Gilmore, the U.S. Court of Appeals for the Ninth Circuit reinforced the importance of complying with drug laws for doing business in the Cannabis industry. In Gilmore, hunters provided a tip to local authorities on a cannabis grow site in El Dorado County, California. Upon executing a warrant, the officers seized over 100 cannabis plants and detained three men. One of the men claimed he rented the property with the intent to cultivate medical cannabis legally under California state law. Nevertheless, the authorities obtained an indictment charging the men with manufacturing cannabis plants due to the grow site being located on federal land.

Since 2015, Congress has barred the Department of Justice (DOJ) from using appropriated funds “to prevent [certain States, including California] from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” SeeConsolidated and Further Continuing Appropriations Act § 538 (“§ 538”). Although one defendant plead guilty, the other two defendants claimed that § 538 prevented the DOJ from prosecuting them since medical cannabis cultivation is legal under California state law. The Ninth Circuit rejected the defendants’ argument on the premise that “nothing in California law purports to authorize the cultivation of marijuana on federal land.”

As a result, the DOJ’s enforcement of federal laws on federal land does not prevent California from otherwise implementing its medical cannabis regime. The Ninth Circuit held that because § 538 does not apply to offenses committed on federal land, state law defenses are irrelevant. Also irrelevant, is whether the defendants knew the grow site was on federal land since the government is not required to prove such knowledge to convict under 21 U.S.C. §§ 841 and 846.

For New Jersey businesses involved or invested in the cannabis industry, Gilmore stands as a reminder that operations must comply with both federal and state law. New Jersey businesses should be concerned with doing their due diligence before utilizing any property on federal land or subject to federal laws. Overlooking to do so may not only be bad for business but could lead to criminal penalties.

Special thanks to Leo D. Bronshteyn, Summer Associate, for his contributions to this article.

A Sixth Circuit appeal from a Michigan court ruling may prove troublesome for property owners in the cannabis industry. If the Sixth Circuit affirms the lower court’s decision, it would set a precedent whereby a landlord may be denied insurance coverage for damage done to his or her property by a third-party tenant who, without the landlord’s knowledge, used the property to illegally cultivate cannabis. The real issue becomes apparent, however, when a landlord knowingly permits a tenant to cultivate cannabis on its property in compliance with state law but in violation of federal law.

This begs the question; if a property owner uses or permits the use of its property as a state compliant cannabis grow facility, can that property owner be confident that he or she will not be denied coverage?

In the case soon to be before the Sixth Circuit, K.V.G Properties, Inc. v. Westfield Insurance Company, the insurer’s position relies on an exclusion in the landlord’s insurance policy that denies coverage for loss or damage caused by or resulting from dishonest or criminal acts by a landlord or anyone to whom the landlord entrusts the property for any purpose. Focusing largely on the above illegal acts exclusion and the fact that the tenant’s cannabis cultivating operations were illegal under federal law, the lower court ruled in favor of the insurer.

In its appeal, the landlord, K.V.G. Properties, Inc. (“KVG Properties”), asserts that the insurer cannot justifiably deny coverage by invoking a vague, broad, and convoluted illegal acts exclusion. Specifically, KVG Properties highlights that the exclusion cannot be invoked when the conduct is uncertain to be illegal under applicable state law and when the federal law largely relied upon is rarely enforced. If the Sixth Circuit agrees with KVG Properties’ reasoning and reverses the lower court’s ruling, it would provide more clarity on this issue for property owners using or permitting the use of their property as a state compliant cultivation facility.

Notwithstanding the arguments presented by KVG Properties on appeal, the Michigan lower court ruling establishes that landlords cannot assume that simply because conduct is legal under state law, that they’re protected from being denied coverage for conduct that is still deemed criminal under federal law. Ultimately, the outcome of each insurance claim for coverage is determined principally by specific facts and policy language. Property owners should consult with counsel prior to using or permitting the use of their property for cannabis-related uses.

Special thanks to Melanie M. Lupsa, Summer Associate, for her contributions to this article.

Since 5 new medical conditions were added to the list of conditions available for treatment with medical marijuana in the March 2018 Executive Order 6 Report, over 7,000 new patients have been added to the patient pool. Due to the significant expansion of the patient pool in the past few months, the New Jersey Department of Health (DOH) has determined that additional treatment centers are necessary to meet the needs of the current and future patients in the Medical Marijuana Program.

As of today, the New Jersey Department of Health Division of Medicinal Marijuana released a Request for Applications (RFA) for up to six (6) vertically integrated alternative treatment centers. The applications will be divided between the Northern, Central and Southern regions of New Jersey with up to two alternative treatment centers per region. The DOH stated in the RFA that it anticipates the release of two additional RFAs in the Fall of 2018 and Winter of 2019 for additional cultivator and manufacturer licenses and dispensary licenses, respectively.

In the wake of Governor Phil Murphy’s Executive Order 6 and subsequent issuance by the New Jersey Department of Health (the “Department”) of its report on the expansion of the State’s medical marijuana program, prospective New Jersey patients continue to seek entry into the existing framework. Currently, the State is attempting to serve approximately 22,000 patients via only five operating dispensaries (with a sixth to open in the near future, pending final approval from the Department). In an effort to meet seemingly exponential demand, many patients, lawmakers and medical professionals are focused on expanding access under the existing program – most recently evidenced by the introduction earlier this month of Senate Bill No. 2426 (the “Bill”), a bi-partisan bill sponsored by Senators Joseph Vitale (D-Middlesex), Nicholas Scutari (D-Union) and Declan O’Scanlon (R-Monmouth).

Through a combination of new regulations and amendments to the existing New Jersey Compassionate Use Medical Marijuana Act (the “Act”), the Bill seeks primarily to increase patient access to medical marijuana and to address increasing demand through the licensing of additional cultivation facilities and dispensaries across the State. With a specific eye toward expansion, the Bill proposes to increase the number of alternative treatment centers (“ATCs”) to 40 licensed medical marijuana dispensaries and 12 medical marijuana cultivator-processors, evenly distributed across the State. The Bill would also allow license holders to operate from more than one physical location, thereby increasing the scope of service of these facilities. Licenses would be valid for three years, renewable on a biennial basis, and would be transferrable upon Department approval of the proposed transferee.

For interested applicants, the Bill provides guidance with respect to application criteria and evaluation metrics, based on a proposed 100-point rubric. In addition to any “bonus points” awarded by the Department, the Bill sets forth the following proposed benchmarks:

Operating Plan Summary (up to 21 points)

Environmental Impact Plan (up to 4 points)

Safety and Security Plans and Procedures (up to 7.5 points)

Summary of Applicant’s Business Expertise (up to 15 points)

Summary of Proposed Location for ATC (up to 15 points)

Community Impact and Social responsibility (up to 15 points)

Workforce Development and Job Creation Plan (up to 7.5 points)

Business and Financial Plan (up to 15 points)

In evaluating an application, the Department shall place emphasis on the experience of the applicant, the controlling owners and entities under common ownership or control with the applicant, and the experience of its officers, directors and full-time employees.

In addition to the modified application and ownership and operational requirements for ATCs described above, the Bill proposes to broaden the scope of the Act by increasing patient eligibility for treatment of any medical condition diagnosed by a physician, rather than a list of enumerated conditions as provided under the Act. Further, the Bill increases the maximum amount of medical marijuana that may be dispensed to a patient in any 30-day period from two ounces to four, and allows for the distribution of edible forms of medical marijuana to qualifying patients who are minors. The Bill also places limitations on application fees and procedural hurdles for both patients and primary caregivers, while also removing registration requirements for treating and/or referring physicians, all facilitating ease of access for qualifying New Jersey patients.

As New Jersey proactively addresses increasing demand, New York appears to be prepared to follow suit. Once stark opponents of legalized cannabis, both Mayor Bill de Blasio and Governor Andrew Cuomo seem to have acquiesced to the idea as an inevitable outcome. In the past month, Mayor de Blasio directed NYPD officers to cease arresting individuals using marijuana in public, while Governor Cuomo ordered an official state-commissioned study on the impact of legalization – all on the heels of a report issued by New York State Comptroller Scott Stringer earlier this month, concluding that legalized marijuana could create a $3.1 billion market in the state. These measures find federal support from U.S. Senators Chuck Schumer and Kirsten Gillibrand, each who continue to vocalize support for legalization.

As state, federal and public support continue to mount, New Jersey appears poised to expand its medical program, trending toward Governor Murphy’s original campaign goal of full scale legalization. With New York potentially close behind, this could be the catalyst for a shift in the cannabis narrative on the East Coast.

As the State of New Jersey continues to evaluate the expansion of current legislation related to medicinal use cannabis and the legalization of recreational cannabis, proposed legislation advancing in the New Jersey legislature has set its sights on marijuana’s less psychotropic relative – industrial hemp.

If passed, Assembly Bill No. 1330 (the “Bill”), introduced in February of 2018 and sponsored by Assemblyman Reed Gusciora, would enable licensed businesses to plant, grow, harvest, possess, process, distribute, buy and sell industrial hemp for commercial purposes. The Bill defines industrial hemp as an agricultural product that is part of the plant of any variety of Cannabis sativa L. with a delta-9-tetrahydrocannabinol (“THC”) concentration of 0.3% or less on a dry weight basis. This threshold of THC is intended to ensure that legally harvested industrial hemp maintains no more than a small percentage of THC, the psychoactive, “high-producing” ingredient in marijuana. To ensure compliance, the Bill requires that licensees submit, on an annual basis, documentation confirming that such industrial hemp is of a permissible type and THC concentration.

Pursuant to the Bill, prospective growers and distributors must apply to the Secretary of Agriculture (the “Secretary”) for an industrial hemp license, which must include specific documentation with respect to, and a legal description of, the land to be used for growth and production of the crop. Applicants are also required to submit to fingerprinting and both a nationwide and statewide criminal history and background check by the Department of Law and Public Safety and/or the Federal Bureau of Investigation. All issued licenses will be valid only for the site or sites specified in the license, and for a period of one (1) year from the date of issuance, unless otherwise adjusted by the Department of Agriculture to align with the normal growing season and to facilitate reasonable harvesting, processing and sale or distribution timing.

The Bill also tasks the Secretary, in consultation with the Attorney General, to adopt certain rules and regulations facilitating administration and enforcement. These regulations include (1) the establishment of approved varieties of industrial hemp and methods to distinguish it from other types of marijuana, (2) testing protocol for THC levels, (3) licensing requirements, fees and renewal procedures, and (4) penalties for administration and enforcement. Finally, the Bill requires that licensees notify the Secretary and the Attorney General of all sales or distributions of industrial hemp during the calendar year, and identify by name and address each distributee of industrial hemp for such calendar year.

Beyond the Bill, industrial hemp would be subject to the protections of the Right to Farm Act, and the land used for its cultivation may be eligible for valuation and taxation benefits provided by the New Jersey Farmland Assessment Act of 1964 – an Act permitting land actively devoted to agricultural use to be assessed at its productivity value, which is often less than the property tax assessment value of the property.

The enactment of the Bill is poised to offer a substantial boost to New Jersey’s agricultural industry, introducing what some view as a new “cash crop” to New Jersey’s repertoire and would afford New Jersey farmers the opportunity to diversify their products and compete in a nearly $500 million industry, catalyzing manufacturing and economic opportunity across the State. The Bill now also finds federal legislative support, following introduction of the Hemp Farming Act of 2018 in late April, co-sponsored by Senate Majority Leader Mitch McConnell (R-KY) and Senate Minority Leader Charles E. Schumer (D-NY). The federal bill, among other things, would remove industrial hemp from Schedule I of the Controlled Substances Act, and would empower the states to be the primary regulators of the industry.